Russia plans to open its first Islamic bank this year, seeking to attract Shariah-complaint funds as international sanctions push the economy toward a recession.
The State Duma, the lower house of parliament, may review the law to allow Islamic banking in the next two months, said Anatoly Aksakov, a deputy in the assembly and president of the Association of Regional Banks of Russia. The goal is to establish a legislative framework in the second half of the year, he said.
“The amendments are aimed at attracting capital from Islamic countries first of all, the United Arab Emirates, Arab states, Malaysia, Indonesia,” Aksakov said by phone from Moscow Thursday.
Russia aims to attract “tens of billions of dollars,” including Shariah-compliant funds, to finance government-backed projects such as railroads and domestic manufacturing, he said.
A combination of sliding oil prices and sanctions imposed by the U.S. and its allies following President Vladimir Putin’s annexation of Crimea from Ukraine in March have left Russia, the world’s biggest energy exporter, on the brink of a recession. Moody’s Investors Service cut the country’s credit rating to junk last week, citing the Ukraine crisis, exchange rate shocks, oil prices and the country’s restricted access to international capital markets.
Russia isn’t the first Muslim-minority country to venture into Islamic finance. The U.K., Luxembourg and South Africa sold debut sukuk last year, entering a global market that PricewaterhouseCoopers estimates will reach $2.6 trillion by 2017.
About 15 percent of Russia’s 142 million people are Muslim, U.S. government data show.
Amending the law alone won’t open the floodgates for capital from the Middle East, according to Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG.
“This is just the first step and it’s going to take time,” Bantis said by phone from Dubai Sunday. “Although Russia is building stronger ties with the region at the political level, the investment side will require political regimes in the UAE and other Gulf countries to incentivize investments.”
The rating cut by Moody’s on Feb. 20 followed Standard & Poor’s, which downgraded the country to junk last month. Sanctions have left Russian corporate borrowers cut off from international debt markets and curbed investor appetite for the ruble, stocks and bonds.
The economy is forecast to shrink 4 percent this year, according to the median estimate of 34 analysts compiled by Bloomberg. Growth slowed to 0.6 percent last year from 1.3 percent in 2013 as the ruble slumped 46 percent and oil tumbled almost 50 percent. Oil and natural gas account for about half of Russia’s revenue.
Crude rose 3.9 percent so far this year to $59.59 a barrel at 14:52 p.m. in Dubai.
“Amid the ruble devaluation, we can supply the domestic market with goods that used to come from abroad and have become too expensive,” Aksakov said. “We are hoping Islamic finance resources will help with new projects.”
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